Corporate interest in mergers and acquisitions has piqued during the fallout from the coronavirus pandemic. Although the economy remains unsettled, many are predicting a wave of M&A activity in the relatively near future as companies seek to solidify their positions. Michele Brown, Chief Ethics & Compliance Officer of Leidos, has participated in a number of very significant transactions in the last few years, and has advice for companies and compliance teams who may soon find themselves in a similar position.
Michele Mintz Brown, Chief Ethics & Compliance Officer, Leidos
Tyler Lawrence: Michele, can you give me a brief overview of Leidos, its recent history, and what your role as Chief Ethics and Compliance Officer is?
Michele Brown: Leidos is a Fortune 500® information technology, engineering, and science solutions and services leader, working in the defense, intelligence, homeland security, civil, and health markets. The company’s 37,000 employees support vital missions for our government and commercial customers. We celebrated the company’s 50th anniversary last year. As the Chief Ethics and Compliance Officer, I’m responsible for leading the company’s Ethics and Compliance Program. I also oversee Leidos’ Hotline and Investigations Program. I’m a member of our executive leadership team, reporting to our CEO Roger Krone, and in that capacity I have an elevated platform that raises the prominence and visibility of ethics across the population base.
TL: Since spinning off SAIC in 2013, Leidos has acquired quite a few other companies, and continued fairly rapid organic growth as well. Can you give us just a little bit more about that history, and the challenges that expanding that quickly has presented for you as Chief Ethics and Compliance Officer (CECO)?
MB: We have experienced tremendous organizational change in the past seven years. As you mentioned, in 2013 we spun off our engineering IT and technical services business, and renamed ourselves Leidos. Then, three years later, in August 2016 Leidos merged with Lockheed Martin’s Information Systems & Global Solutions (IS&GS) business, which doubled the size of the company. This year, we completed two strategic acquisitions. At the end of January, Leidos completed the acquisition of Dynetics, which is an industry-leading applied research and national security solutions company, and then just two months ago in May, Leidos completed its acquisition of L3Harris Technologies’ Security Detection and Automation businesses.
The merger with IS&GS in 2016 was a significant, transformational deal. The challenge when combining two organizations with well-respected cultures is, how do you put them together without sacrificing the strengths of both organizations?
The communications that took place, leading up to and following the merger, were key to building an ethical culture by promoting transparency, which builds trust. We took a highly collaborative approach. We’re very cognizant of the fact that it’s an uncertain time for incoming employees, so there were multiple town halls across the various geographical locations, and a range of communications throughout the integration process, emphasizing that ethics is a significant pillar of the organization. Shortly after onboarding, the IS&GS employees were required to take our annual ethics awareness training, which is promoted by me and our CEO. They were also required to certify that they read and understood our Code of Conduct.
In addition, we implemented a campaign, not just for the incoming new IS&GS employees but for legacy Leidos employees as well, that we refer to as “Everyone is a Leidos Ethics Officer.” The intent was to get employees to think differently about ethics, and their responsibility to uphold our corporate value of integrity in all they do. It emphasized that every employee is dual-hatted to also serve as an ethics officer, in addition to the role that they were hired to take on at the company. All of our campaigns since, and our key ethics communications, touch on this theme.
TL: What surprised you most during the integration?
MB: Despite doubling our employee population, and all of these steps that we were taking, we experienced an under-reporting of ethics-related concerns. We just assumed that doubling the employee population would naturally and immediately result in a doubling in the number of concerns, but that’s not what happened. We learned from various studies that in times of stress, like a merger, employees observe an increase in misconduct by 21.5%, but don’t report potential issues. Often employees feel that it isn’t a good time to stick their necks out, and instead just keep their heads down.
To address this, we embarked on a full-court press. We began publishing an annual year in review, providing a comprehensive overview of the investigations process and activity from the prior year to promote confidence and awareness of the robustness of our investigations program. This reinforced the various disclosure channels that were available at the company for reporting a concern, and also emphasized that we have zero tolerance for retaliation. We also began issuing a quarterly publication called Let’s Talk Ethics, which examines real ethics-related cases at Leidos. It has garnered a high readership and encourages dialogue on our company intranet.
About 10 months after the merger, we issued an Ethical Culture Survey. We felt that was very important to establish a baseline and identify areas for improvement. As part of my continued emphasis on transparency—my personal mantra is that “transparency promotes trust”— I communicated the results of the survey to all of our employees, letting them know the favorable results, and also areas for improvement, how we had already addressed some of those issues, as well as our plans to address remaining gaps. We also revamped our internal ethics intranet page to make information and resources more readily available. Further, we completely revised our Code of Conduct. We felt that was needed to reflect who we were as a new company with new core values—with all of the changes that we had undergone, we weren’t the same company any longer.
TL: You all had assumed, naturally, that doubling the employee population would naturally lead to a doubling in numbers of reports, when actually you did not see that at all. How long did it take for you to see results once you started communicating about that problem and targeting it with communications and other things?
MB: It wasn’t until the end of the second quarter of 2017 that the number of concerns reached the level that we had anticipated. We attributed the under-reporting to two primary factors. One was that employees weren’t raising their hands to report concerns in general. Also, we had to unpack how the legacy company handled concerns. We learned that many concerns were addressed at the local level within the business organizations. As a result, we embarked on a campaign to educate both managers and functional leads, reinforcing our processes to ensure that concerns were independently reviewed and addressed.
TL: We just had a lot of discussion about the merger in 2016, but you have two major acquisitions that have gone through just this year. What kind of due diligence embedding were you able to do? What are you looking for as part of that process as the CECO?
MB: We have a highly integrated and robust due diligence process across the corporate functions and business line organizations. Ethics & Compliance plays a key role in culture assessment, and our expertise there is critical. We want to get a sense of their ethical culture, and we’ll look at their Code of Conduct and policies in various compliance areas to assess the robustness of their ethics and compliance program, and whether there are any gaps.
With IS&GS and the two acquisitions this year as examples, we take a very close look at their compliance training, including comprehensiveness and frequency. We assess whether there is a hotline and if it allows for confidential reporting. We review their investigations process and case management system. We look to see if there is an independent ethics function, where it falls within the organization, and its reporting structure. Together, those assessments tell a lot about how ethics is viewed and valued by the company. And I can’t emphasize this enough—potential deals have been taken off the table because cultures weren’t compatible. We are not afraid to walk away from those kinds of deals, and we have.
TL: Expand on that just a little bit for me, if you don’t mind. What would be the sort of red flag that has emerged, or might emerge, as you were looking at a potential acquisition target, that would make you say, “Actually, this is a sign that maybe these cultures just aren’t going to match the way we need them to?”
MB: From an ethics and compliance and legal perspective, rarely is there a single cause for walking away. Rather, it is based more on the totality of the red flags and circumstances. We review prior and ongoing litigation and investigations. As examples, is the target currently under investigation or about to be investigated for corruption-related issues? Have significant penalties been imposed on the target and, if so, do they reflect an isolated incident or one that implicates cultural and systemic failures? And again, there are instances in which we have walked away, where that compliance and enterprise risk profile is simply too great for us to want to pursue.
TL: Not necessarily so much about hard and fast rules, but more being able to look and divine whether there’s a culture problem, or just a few bad actors that were taken care of?
MB: That’s right. We rely not only on publicly available information, but information that we are privy to as part of the due diligence. There’s also the opportunity to speak with members of the leadership team as part of due diligence to really get a sense of their overall ethical culture and management approach. Because ultimately, why we’ve been so successful is because of those really strong cultural alignments in value sets, and as a result, that’s something that we focus heavily on in these pursuits.
Due diligence also encompasses an assessment of how the target operates, not just from a financial standpoint but the manner in which they integrate their values into their operating procedures and business activities. This requires examining their core values, and whether they really live by them and operate with integrity. It’s the soul of the company we’re assessing to make sure it’s the right fit.
This often makes a difference from the seller’s perspective too. Dynetics leaned towards us over other bidders because they thought it would be a better fit culturally, so their people would be happier with the acquisition. If the culture clashes are too great, you will end up having a larger retention problem, especially for a services and solutions company like ours where it’s all about our people.
TL: You look at the company, you decide there’s nothing here that gives us tremendous pause, but there’s still culture differences potentially that have to be worked out. What is your strategy for approaching cultural integration?
MB: I think that the strategy is driven by the complexity and magnitude of the transaction. For instance, the IS&GS merger, as I mentioned, was a transformational deal. After we entered into a definitive agreement to merge with IS&GS, an Integration Management Office was created to plan the integration and remove as much uncertainty as possible. We apply a programmatic, systems engineering approach to such deals. We ran our 2013 corporate split, and then the merger with IS&GS and other acquisitions since, with the same level of rigor as we do with one of our complex programs, with a dedicated team who focuses solely on the integration planning and implementation effort.
For IS&GS, the Integration Management Office had a dedicated lead for each company, and then across each function and core businesses, a lead was appointed from each company. These weren’t second jobs—they were viewed as high profile positions with extensive executive involvement. This approach was extremely effective in promoting collaboration and creating alignment within and across the business. It was also an opportunity to look under the hood of both organizations, and really take the best of the best from a policy and process standpoint. In addition, we created a mixed leadership team. Further, soon after the deal closed in August 2016, the new executive leadership team developed a new vision, mission statement, and core values for the company. Our CEO felt very strongly, and quite appropriately, that we as a leadership team needed to own this due to the importance of creating the culture for the new Leidos that blended the strengths of both organizations.
TL: So that was quite the involved process for the merger, which like you said was transformational for the organization. But for the acquisitions like the ones that you completed earlier this year, and now you’re going through the process of integration, how did you adapt that process for Dynetics and L3Harris?
MB: We have scaled it to size. For Dynetics, as an example, we named a Corporate Integration Executive to leverage the existing capabilities and resources in our functions that were developed during the IS&GS merger. It was a more cost-effective approach that was enabled by Leidos’ established capabilities. We have an integration team for the L3Harris integration as well. With every deal there have been lessons learned and efficiencies created. I can talk a little bit more, if you’d like, on how we’ve handled this in light of the pandemic. But having key leads across both organizations has enabled the integration and the embedding of culture to occur more quickly.
TL: Since you mentioned it, let’s talk a little bit about the pandemic, and how that has changed the way you’re going about things, because lots of people are predicting that as we go forward we’re going to start seeing more and more M&A activity, given the state of the economy right now. You all completed one acquisition right before everything changed, and you completed the second one in May, several months into the pandemic. I’m curious how that has altered the way you approached the integration conversations, and if there’s anything that you’ve learned from the process that you would pass on.
MB: For Dynetics, we were fortunate in that integration had already advanced quite a bit by the time that the pandemic had struck, so good relationships were already established, which enabled virtual work to proceed smoothly. There had already been several site visits and there was a town hall with many members of the leadership team that had already taken place. We also have an integration team that meets weekly, and has a highly disciplined approach to moving the integration forward.
With the L3Harris Technologies’ Security Detection and Automation businesses, the challenge was doing the integration entirely virtually. And to complicate things even further, the employee population is very dispersed geographically, and we now have equipment and operations in 120 countries. So, again having that cultural compatibility is key, just like we did with IS&GS. We’ve been fortunate with how culturally compatible the businesses are with Leidos, and that the employees appreciate the importance of having a strong compliance program and ethical foundation.
It’s not a foreign concept for them to have to take ethics and compliance training, as an example. The integration team had a very effective communications strategy from day one. This was developed pre-pandemic as part of the integration planning phase, where we’d get the messaging out to every employee. One of the biggest challenges is determining the translation needs for our non-U.S. employees. We’ve had to adapt and do translations more quickly, and with a global tone that’s not just focused on the U.S. To that end, leveraging the regional leadership teams has been instrumental to help understand the cultural, and other issues at play, such as in the Asia-Pacific region in particular.
But I have to say that overall, we have been pretty amazed at how quickly these employees have acclimated. Of over 1,200 employees as part of this acquisition, 75% of them were on our systems within the first 30 days, and the remaining employees will be on our systems within 90 days post-close.
I think through all of these efforts, the key is the communications strategy as part of that integration, and like I said, leveraging leaders who are geographically dispersed. One other thing worth noting: we thought that the inability to have in-person meetings with global customers would present challenges, but interestingly our customers have generally been working remotely, so they have been receptive, and they’re also captive audiences. And our leaders, in the meantime, don’t have to figure out the logistics of traveling all over the world to attend certain meetings.
TL: Aside from M&A activity, what work is your team at Leidos doing right now that you’re most interested in, or excited by, what are you most looking forward to?
MB: Our Ethics Directors are expanding their outreach with more employees working remotely as a result of the pandemic. They are developing communications and other resources to help managers effectively lead during this time, to continue to build our culture in a more virtual manner, and to help reduce compliance risks with less oversight. I’ve got a few others, Tyler, like data analytics, if you’d like to hear about those as well.
TL: Actually, I would be curious to hear a little bit more about what you’re doing on the data analytics front.
MB: This is a continued area of focus, and in particular broadening our data analytics capabilities to provide more forward-thinking, predictive analytics. This involves integrating data sources to track and assess trends in compliance issues and risk assessments; and creating models that can identify locations, organizations, or programs where more ethical concerns and compliance risks may exist. We are also working to provide a mapping feature (a heat map) that would allow us to better examine geographical areas, looking at various risk factors, demographic makeup, etc.
And the last thing, and I mean this quite genuinely, is that next month Ethisphere is going to be issuing its questionnaire as part of its World’s Most Ethical Companies’ program. The process has become a very significant one for us to benchmark our program, and we hope to be recognized for the fourth consecutive year as one of the World’s Most Ethical Companies. That recognition has impacted the ethical culture of Leidos, in that it is a tremendous source of pride for our employees, and it has become part of the fabric of the conversation of who we are as a company. We are one of the World’s Most Ethical Companies, and our employees very much want that to continue.
TL: Well, are there any final points you wanted to make Michele?
MB: I would just add this, for CECOs whose companies might be considering any sort of M&A activity going forward. We touched on this already—never underestimate the importance of culture. Most deals fail because of cultural incompatibility, so give great attention and care to make sure that it’s a good fit for the organization. I really do believe that we have been successful because of good cultural alignments and value sets, with companies who are dedicated to the mission and customer, and who are agile, and also have tremendous integrity.
About the Expert:
Michele M. Brown is a Senior Vice President and the Chief Ethics & Compliance Officer for Leidos. She is responsible for administering the company’s Ethics and Compliance Program. This includes development of corporate policies, procedures, and training to ensure that Leidos complies with applicable laws and regulations and that employees act in accordance with the values and standards in the company’s Code of Conduct. Brown manages a comprehensive investigative process that assures appropriate resolution of compliance issues and concerns. She also serves as Deputy General Counsel, providing legal, investigative, and litigation support on issues involving government and commercial contracting and regulatory compliance.